How to account for start-up costs

Understanding Startup Costs

The types of expenses faced by startups will depend on a number of factors: the location, the size of the team, the product/service and more. Search online and you’ll find a range of startup cost calculators that will help you to calculate costs effectively.

Calculating these costs can seem like a laborious and daunting task, but it’s necessary: it’ll help you to avoid any nasty surprises down the line, and demonstrate to any potential investors or creditors that you have planned carefully.

Calculating Startup Costs Effectively

The most effective way to calculate your startup costs is to ensure that you have a solid business plan in place. Whether you put this together on your own or with the help of an accountant, a business plan should include details of your predicted expenses, revenue and profit over the first few years of operation.

This will include startup costs. What’s important to remember is that some of these startup costs will be one-off costs (like buying office furniture), while others, like payroll costs, will be ongoing. All of these should be included in your business plan: you can find startup cost calculators online, and small business accountants will also be able to help with your calculations.

Here are 13 startup costs you may or may not have considered…

Equipment Costs for Startups

Your equipment costs will, of course, depend on the nature of your business. It may be that all you need is a laptop, a telephone and an internet connection. It may be that you need to purchase transportation, shipping equipment or specialised items specific to your sector.

Your budget – and your personal preference – will help you to decide whether you buy this equipment outright, or whether you lease at least part of it to start with.

Incorporation Fees and Legal Costs

Incorporation fees are low compared with other elements of startup accounting, but still need to be considered. When you set up your business, you’ll need to decide on a trading name as well as the type of entity your business will be (sole trader, limited company, partnership).

The Government’s website details the fees charged for company incorporation, which you can see here. These start from as little as £10, but it’s important that you choose the right option to save you significant hassle should you get it wrong.

You may also need to pay for legal advice in certain circumstances: if you’re registering Intellectual Property, if you’re writing contracts between you and suppliers/customers/employees, or if you’re signing leases or buying property.

These legal fees will vary depending on your exact needs and the complexity of your business. It’s worth contacting law firms with experience in startups to get an accurate quote for your business plan.

Office Space and Operational Expenses

It can be easy to keep costs down when it comes to office spaces for startups. If you’re starting solo, you may decide to work from home to keep costs down.

If home working doesn’t appeal, co-working spaces can be an affordable alternative – and will also suit those working with a couple of others.

If your team is larger – or if you need space for equipment – you’ll need to budget for leasing or buying a working space: both the initial costs and any associated ongoing regular fees.

Inventory Management and Costs

Businesses selling tangible products will need to ensure that they have inventory to sell before they start trading.

Deciding on inventory levels can be challenging. Too little and you may run out of stock, leaving customers waiting. Too much and you could risk stock damage or spoilage – or be left out of pocket should it not sell.

Different sources recommend setting aside between 17% and 35% of your operational budget for inventory – although this, of course, will depend on your specific business. However, it is worth investing more in inventory at the start: you’ll want to ensure that you begin with strong sales from the outset.

Marketing and Advertising Budgeting

When understanding how to account for startup costs, you’ll be pleased to know that your marketing and advertising budget will generally be only 10% – or even less – of your startup costs.

Without marketing and advertising your business will be unlikely to succeed. However, it doesn’t need to cost a fortune – if anything. With social media so prominent, it’s a popular choice of channel for brands looking to make themselves known.

Any other marketing or advertising options you choose – from business cards and brochures to online or print advertising – will depend on your preference, your target audience and your budget. Some entrepreneurs may decide to bring in a marketing consultant, which will, of course, add to the cost.

Website Development and Maintenance Costs

No matter what type of business your startup is, building and maintaining an online presence is vital. Many consumers will look online before they decide whether to use a company: your website will need to be professional and easy to use, displaying all of the information that potential customers need to be able to make a decision.

There are services like WordPress and Wix that allow you to build a website free of charge. However, they do come with premium options that give you more flexibility – and these will incur a monthly fee.

To look truly professional, it’s likely that you’ll purchase a domain name for your website, which you’ll need to pay to renew each year/two years. Depending on the content of your website you may also need to pay hosting fees, which are generally charged monthly.

Office Supplies and Furniture Expenses

Even if you’re working alone from home, the cost of office supplies can be higher than you might think. By the time you’ve purchased a desk, a chair, a computer and printer and a telephone/answering machine, it’s likely that you’ll already be looking at over £1,000. That’s without including any software or additional hardware you may need, too.

With employees, a business partner or a dedicated office space, these costs can mount up. You’ll need additional furniture, hardware and software licences. You’ll need to think about communal office equipment, like hot drink or kitchen facilities. There may also be additional tools that your business needs – but remember, leasing may be an option for some of these items.

Utilities and Ongoing Operational Costs

According to Bionic, microbusinesses pay, on average, £1,332 in annual gas costs and £3,337 in annual electricity costs. If you’re planning on growing quickly – serving more customers or increasing your headcount – these averages can rise rapidly.

You should also factor in – no matter how unlikely you think they are – unexpected operational costs, like equipment repairs or replacement.

Payroll Management for Startups

Employing staff? They’ll need to be paid. As well as salary, think about the cost of any benefits your team will receive, as well as tax and National Insurance payments.

If you’re using an external payroll company or you’re planning on purchasing payroll software, these costs should also be included when planning for employee compensation.

Consulting with Professional Accountants

If you have accountancy expertise, you may well consider handling all accounting-related matters to your business by yourself. However, many entrepreneurs don’t – and most will want not only to free up their time to focus on the business, but also to ensure that they get everything absolutely right. At QAccounting, we’re specialist accountants for startups.

Accountants for startups can help with everything from business planning and registration to tax management, cashflow, business growth and more. You can read more about the role of accountants in managing startup finances here.

Insurance Costs for Startups

Insurance is a vital part of startup accounting, protecting both you and your business should things go wrong.

The types of insurance you’ll need will depend on your sector, your business and how you operate. Relevant policies could include professional indemnity, public liability, commercial property insurance and cyber insurance. Others may include product liability insurance, employer’s liability insurance and office insurance.

Tax Considerations for Startups

As a limited company, you’ll be responsible for paying corporation tax on your profits each year. If you’re VAT-registered this will also need to be taken into consideration, as well as being responsible for income tax and National Insurance payments for your employees.

Planning and budgeting will ensure that you’re not left struggling when the time to pay comes around.

Travel and Shipping Expenses

Business travel can soon add up: train tickets, accommodation, food and drink and fuel costs can mount up for a one-man-band, and even more so if you have employees. Think about how frequently you and your team will need to travel, and consider joining travel-related loyalty schemes to keep costs down.

Companies that sell physical products will also need to factor in shipping costs. These will include not only the cost of postage/couriers, but also the cost implications of any packing and labelling materials.

Seeing all of these costs in writing may seem overwhelming. There are, however, ways you can keep these down.

Saving on Startup Costs

If you’re assessing how to account for start up costs and things are looking impossibly high, there are various methods for keeping initial expenses down.

Consider starting small with your product or service offering to minimise production and marketing costs, increasing your range as your business grows. Working from home and/or leasing equipment can reduce initial property and equipment costs, while many software providers offer free trials or free subscriptions under a certain number of users.

Marketing can be done free of charge via social media – or cheaply by offering incentives for customers to recommend your business to others. In terms of startup accounting, using a provider like QAccounting can be significantly cheaper than hiring a local accountant, but still gives you the same expertise and peace of mind.

If your startup costs are still prohibitively high, you may need to look for sources of startup funding.

Securing Startup Funding

For an unproven startup, securing funding in the form of a loan can often be challenging – however, there are providers that will offer to entrepreneurs. A business credit card can help you to cover some of your initial expenses, while for some businesses, crowdfunding could provide a solution.

It is also worth looking into startup grants, and whether your business may be eligible to apply. If you’re still finding funding a challenge – or are struggling with any other aspect of startup costs – get in touch. At QAccounting we’ve a wealth of expertise in providing accounting services to small businesses and startups, and we’re happy to help.